S&P confirms France's AA+ rating, warns on deficit

Last Updated: Fri, Nov 23, 2012 09:20 hrs

Standard & Poor's rating agency confirmed France's long-term rating of AA+ on Friday and negative outlook but warned the government was likely to miss its public deficit target next year.

Days after rival Moody's stripped France of its Aaa rating, S&P applauded the Socialist government's plans to help restore France's competitiveness largely with tax credits to companies.

However, the ratings agency warned that the public deficit was set to miss the government's target of 3 percent of national output next year, estimating a budget shortfall of 3.5 percent.

"The affirmation reflects our opinion that the French government remains committed to budgetary and structural reforms that would build on the measures it has proposed so far and improve the country's growth potential," it said in a statement.

Moody's downgraded France one notch to Aa1 on Monday from its to Aaa grade, taking a more skeptical view that reforms undertaken so far by the government would be sufficient to restore the country's waning international competitiveness.

That move, which followed a downgraded by S&P in January, added pressure on President Francois Hollande's government on the economy as it struggles to rein in surging unemployment.

In a break with a steady stream of negative economic data, figures published on Friday showed industrial morale rose more sharply than expected in November, rebounding from a more than two year low in October.

National statistics institute INSEE said its indicator for morale in the manufacturing sector rose to 88 from 85 in October, beating a Reuters forecast for a reading of 86.

Business morale has been steadily declining in recent months as Hollande hiked corporate taxes on big companies as part of France's toughest belt-tightening drive in at least three decades.

However, Hollande unveiled plans this month to improve firms' international competitiveness by with 20 billion euros of tax credits to companies and wants to launch a labour market reform early next year.

"Our baseline expectation is that the government will press ahead with further important structural reforms, despite opposition from vested interests which benefit from long-entrenched entitlements," S&P said.

"Substantial reforms would underpin the government's fiscal consolidation strategy, in our view, and improve economic growth prospects," it added.

France's benchmark 10-year bond yields are holding at just over a historically low rate of two percent, giving Hollande crucial access to cheap borrowing.

The government has stressed it will stick to the 3 percent deficit target for next year. However S&P's forecast that it will fall short of that target matches expectations by the European Commission, International Monetary Fund and a number of financial analysts.

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